MortgageRegulations

Understanding the CFPB and its closing disclosure: Part 2

These new changes will impact the closing process

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Takeaways:

  • What’s the purpose of the Closing Disclosure?
  • What are the exceptions?
  • What does that mean in practice?

The broad scope of the Consumer Financial Protection Bureau’s authority affects the way it views a real estate transaction, as evidenced by some of the new language being adopted and made part of the real estate mortgage lexicon.

For instance, on CFPB-promulgated documents the borrower is now referred to as “the consumer.” The lender is “the creditor.” And when the deal is approved and finally ready to go, you won’t attend a closing; now, it’s “the consummation.”

Does the new language make a difference? The functionality is similar. The buyer obtains a loan needed to close on — pardon me — consummate a real estate purchase. Whether it’s called a closing or consummation, the result is the same. The change in terminology might offer glimpses of the underlying philosophy of the organization.

Purpose

One of the challenges inherent in the Closing Disclosure is foreshadowed in the form’s formal name: TILA-RESPA Integrated Disclosure —Ā Mortgage Loan Transaction Closing Disclosure. The CFPB’s approach is to overlay disclosure information required under the Truth in Lending Act, integrate that with disclosures required under the Real Estate Settlement and Procedures Act, and then bootstrap it together with data required under Dodd-Frank. That is one tall order.

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The good intention behind it is to inform better the consumer. But the reality might be something less.

As with most multipurpose devices — for example, a Swiss army knife — it’s better than nothing when that’s all you have. But the all-in-one is not nearly as effective as a dedicated tool, such as a regular pair of scissors, a can opener or a screwdriver. So it is with the Closing Disclosure form.

Trying to coalesce three separate and distinct disclosures (Truth in Lending, Good Faith Estimate and Settlement Statement) into one multipurpose form is, at a minimum, cumbersome and might, in the long run, prove to be too confusing and thus ineffective. A word to the wise, come August 2015: Anticipate a few nicks and some pinched fingers as lenders and settlement agents make first use of their new multitool.

Exceptions

Not all closings will require the use of a Closing Disclosure. The CFPB’s final rule regarding mortgage loan disclosures applies to most closed-end residential mortgages. As a general rule of thumb, if you are dealing with a residential mortgage with a conventional mortgage source, CFPB rules apply.

It does not apply to reverse mortgages, equity lines of credit, mobile home loans, loans made by a private lender making five or fewer mortgages per year, loans for vacant land with no proposed new construction, or commercial loans. The traditional (1974) HUD-1 settlement statement can be used in closings for any of these excepted transactions. The HUD-1 can also be utilized in cash transactions.

On paper

The familiar HUD-1 settlement statement is evenly balanced in its presentation and content between the buyer and the seller. It shows how the respective parties are affected by the terms and costs of the transaction.

In contrast, the Closing Disclosure is primarily focused on the borrower (buyer) and the terms and costs associated with the mortgage. Three-and-three-quarters pages of the new five-page form discuss to loan-related information pertaining only to the borrower.

The transactional terms and costs for the buyer and seller are condensed into two tables, which comprise the remaining space.

Notwithstanding its highly condensed format, the Closing Disclosure appears to address the terms of a conventional settlement adequately. Whether the form is flexible enough to roll with the demands of all financed purchase scenarios, especially those of the more creative deal-making sort, is yet to be determined.

Getting to the closing table

Preparation of the settlement statement for closing has for decades principally been the responsibility of the settlement agent. The mortgage lender was one of the sources of information incorporated in the HUD-1, contributing a dozen or so figures. The bulk of the information was gathered by the settlement agent in the days leading up to closing. The settlement agent would collaborate with the all the parties, including the lender, as well as other stakeholders (taxing authorities, HOA, lien holders). The settlement agent then tabulated the various costs and circulated a draft statement in advance of closing for preliminary approval.

With the new Closing Disclosure, of the roughly 150 fields of required information, 80 percent are generated exclusively by the lender for the disclosure benefit of the borrower. Only 20 percent of the information is sourced from the settlement agent. This reality signals a significant shift in which the lender will become the primary source of information.

Additionally, the CFPB stipulates that it is the lender’s responsibility to transmit the Closing Disclosure to the borrower. Given this responsibility and the fact that the bulk of the information is generated by the lender, it is likely that the lender will be the new source of the Closing Disclosure, shifting the traditionally placed burden away from the settlement agent.

The CFPB has also issued rules on how and when to provide the Closing Disclosure to the consumer.

Read “Understanding the CFPB and its closing disclosure: Part 1” and stay tuned for Part 3 tomorrow.

Craig Roberts is the president of Capstone Settlement Inc. You can find him on LinkedIn.

Email Craig Roberts.